IRA Rollover Complete Guide

An honest framework for the decisions at hand. Not tax or investment advice — your specifics matter.

Direct vs indirect — never take a check

• Direct (trustee-to-trustee) rollover under IRC § 402(c): funds move provider-to-provider. No mandatory withholding, no 60-day clock.¹
• Indirect rollover: provider mails you a check with 20% mandatory federal withholding (IRC § 3405(c)). You have 60 days to deposit the full gross amount — including making up the 20% from other funds — into an IRA.
• Miss the 60-day window = permanent taxable distribution (plus 10% penalty if under 59½). Also: only one indirect rollover per 12-month period across all your IRAs (Bobrow v. Commissioner rule).²
• Do direct trustee-to-trustee rollover unless you have a truly specific reason not to.

When rollover wins

• Old plan has bad fund menu. Target-date fund with 0.75% expense ratio vs Fidelity FZROX at 0%. Over 20 years on $500K, that's $60K+ of fee drag.
• You have multiple past 401(k)s. Simplicity and asset-allocation coherence matter.
• You want Roth conversion access. IRAs allow Roth conversions; most 401(k)s don't.
• Estate planning. IRAs offer more flexible beneficiary designations and stretch possibilities.

When staying in the 401(k) wins

• Age-55 rule (IRC § 72(t)(2)(A)(v)). Separated from service at 55+? 401(k) allows penalty-free withdrawals before 59½. IRA does not.³
• ERISA creditor protection (29 U.S.C. § 1056(d)). 401(k)s have federal anti-alienation protection. IRA protection is state-specific outside bankruptcy, and capped at ~$1.7M federally in bankruptcy.⁴
• Backdoor Roth cleanliness. Pre-tax IRA balances trigger pro-rata rule (IRC § 408(d)(2)) on Roth conversions of non-deductible IRA contributions.
• Stable-value fund. Many 401(k) plans offer stable-value funds — insurance-wrapped pool crediting book-value rates (typically 2-4%) above money-market but without NAV volatility. Not available in IRAs.

Roth conversion ladder

• Rolled IRA money can be converted to Roth. Pay ordinary income tax today; future growth and withdrawals are tax-free.
• Best in low-income years: gap year before Social Security, first year of retirement, sabbatical, or right after exit.
• Watch: Medicare IRMAA brackets, ACA subsidy cliffs, Social Security taxation thresholds — conversion timing matters.

Full Roth conversion guide: bracket targeting, IRMAA cliffs, the 5-year rules, and a tax-cost calculator →

Common mistakes

• Taking indirect rollover and missing the 60-day window.
• Rolling highly-appreciated employer stock into IRA instead of using NUA.
• Triggering pro-rata rule on future backdoor Roth by moving pre-tax into existing IRA.
• Not rolling inherited 401(k) properly — inherited IRA rules are different from regular rollover rules.

Sources

1. IRC § 402(c) — Direct Trustee-to-Trustee Rollover; 20% withholding under § 3405(c).
2. IRS — Rollover Chart. One-rollover-per-year rule from Bobrow v. Commissioner (Tax Court, 2014).
3. IRC § 72(t)(2)(A)(v) — Rule of 55.
4. 11 U.S.C. § 522(n) — Federal Bankruptcy IRA Protection Cap.
5. IRC § 402(e)(4) — NUA Treatment. One-shot lump-sum distribution requirement.
6. IRC § 408(d)(2) — IRA Pro-Rata Rule (affects backdoor Roth).

Rollover mechanics verified against IRC Chapter 79 and IRS guidance. Direct trustee-to-trustee is almost always the correct choice.